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Commentary: Local TV ad market under pressure

Sluggish economy dragging down media giants' stocks

There's no more denying it: The local TV ad market is under pressure amid a sluggish U.S. economy.

For months, investors and Wall Street have suggested that ad weakness would take its toll on media giants' results as 2008 unfolds, and stock prices increasingly have reflected those worries.

Originally, brass at many companies downplayed recession concerns, but the trends have become too apparent. During the just-ended quarterly earnings season, not even the most bullish management teams could deny that the local TV ad market has been in freefall. Hell, even some national cable networks -- especially at Viacom Inc. -- have seen slower growth momentum.

News Corp. has warned more than other sector biggies of economic weakness this year, and president and COO Peter Chernin put it most clearly in his company's earnings call, saying, "The overall local ad market is highly challenged at the moment."

News Corp.'s latest quarterly local TV station results underperformed Wall Street estimates and even its peers. Its revenue dropped 10%, with weak pacings continuing into the current quarter. "We were a bit surprised and confused about how poorly the television segment is performing," UBS analyst Michael Morris said of News Corp.

CBS Corp. also blamed weak local station trends -- along with sluggish network primetime ratings -- for a steeper quarterly TV ad decline (6%) than analysts had expected.

Even Disney, which has held up better than its peers in a weak economy, highlighted local TV declines. CFO Tom Staggs particularly cited soft spending by auto and financial services companies, as did other industry execs.

That's not surprising. After all, the credit crisis has led to major write-downs by all big banks, and carmakers are selling vehicles amid high gas prices and inflation.

Retailers, many of which have reported disappointing same-store sales trends in recent months, could be next in cutting ad budgets, though the current back-to-school season holds some hope of continued marketing spending for media firms.

Either way, the local ad slump is showing no signs of abating, so management teams have been cutting costs at TV stations to make up for the missing revenue. Although this might not help much over the near team, companies are trying to put themselves in a position to outperform once the ad climate strengthens. Case in point: CBS Corp.

"CBS stock appears to be a very attractive 'buy' at these (current) levels but for long-term holders who do not mind waiting out the recession," Miller Tabak analyst David Joyce said after reducing his earnings estimates on the heels of the company's second-quarter results.

One key question is whether the local ad sluggishness will spread to the cable network ad market, which could particularly mean a hit to News Corp. and Disney.

Most companies have said that national ad revenue remains solid. All but two cable network groups reported double-digit increases in advertising revenue in the latest quarter, Pali Research analyst Richard Greenfield says.

But cable powerhouse Viacom, for one, already has come under pressure. It eked out only a 1% gain in U.S. cable network ad sales for its second quarter, falling short of its already lowered guidance for a 3%-4% increase.

"Midway through the second quarter, scatter volume for several of our networks dropped off," said CEO Philippe Dauman, highlighting that some sectors "adjusted their operating plans and product launches" in a tough economy.

Staggs, meanwhile, said that ad sales momentum also has "slowed somewhat in recent weeks" at ESPN -- and to a lesser extent the ABC broadcast network.

So investors must worry that at least some cable networks could be next in line to feel increased economic pain.

"National advertising weakness is likely to challenge broadcasting and cable in the second half of 2008," Lehman Bros. analyst Anthony DiClemente already predicts.

But Greenfield only expects growth to "slow modestly" for cable network groups in the current third quarter and re-accelerate thereafter.

All in all, ad revenue seems much harder to come by for many in the media industry these days, and things look unlikely to turn around anytime soon. So unless they want to bury their heads in the sand until the economy bounces back, executives at sector biggies have more hard work ahead of them.

On the unfortunate side, it will mean more layoffs and cost reductions. On the more exciting side, some management teams will look for new types of advertisers, explore new opportunities and develop innovative models for new revenue.